ART CHARITY TRAINING SEMINAR Introduction Phillip Callow – Specialist Charities Partner - Mazars 9 May 2005 Charities - Potential Issues Role of the Trustee / Corporate Governance Trustee conflicts of interest Effective trustee meetings Risk management Money laundering Soft vs. Hard
Phillip Callow – Specialist Charities Partner - Mazars
9 May 2005
Role of the Trustee /
Soft vs. Hard
© Mazars 2003
Ian Rodd – Charity Manager - Mazars
We are looking at:
How do Charities differ from Businesses?
Business - exists to make a profit for shareholders
Business - operated by spending money to make (more) money
Businesses accountable to shareholders, regulators….
Charity - exists to fulfil charitable purposes (not for profit)
Charity - receives money in order to spend it on charitable purposes
Charities accountable to donors, regulators…..
Different types of fund:
Unrestricted: Undesignated / Designated
Restricted: Income / Capital
Capital - Permanent Endowment
Designation - by trustees (for future plans, capital items)
Restriction - by donors / terms of appeal. Can only be used for that purpose.
Each restricted fund is a trust - and needs to be accounted for separately.
(So charity accounts can be so complicated…)
Is a restriction permanent?
Restricted fund / contract income
Interest earned on restricted funds
(Interest earned on endowments)
A resource is available when all of the following conditions are met:
Test any transaction against this criteria
Entitlement – is there any condition to be met before trustees can use a receipt ?
In what period does a resource become available to the trustees?
- Tests of entitlement, certainty, measurement
- Is there a condition that needs to be met first?
- Does a contract have to be fulfilled?
- What about donations for capital items?
- Does it matter if it has been spent?
The Wells for Africa Foundation:
What are the issues in accounting for the following items?
- £20,000 to dig wells in Sudan
- £20,000 to dig 10 wells in Sudan
- £20,000 to dig wells in Africa
- £20,000 to fund a well development officer in 2005/06 in Africa
- £100,000 to buy a JCB to dig wells in Africa (expected useful life 5 years)
What happens if it only costs £15,000 to dig 10 wells in Sudan?
- Cost allocations (shared costs)
- Descriptions of resources expended
- Timing of liability recognition (grants)
- But see SORP 2005….
Gives a snapshot of how year end resources are held by type of assets
AND analysis of assets held by fund (usually in notes)
Some unique valuation issues:
- Inalienable assets
- Distinction between assets held for Primary Purpose and Investment
Use of assets
Duty of care
© Mazars 2003
Word of mouth
Trustee recruitment and induction
Secure the property
Conflicts of interest
Emphasis on stakeholder relationships and managing these relationships
All signs of poor overall governance !
“a statement confirming that the major risks to which the charity is exposed, as identified by the trustees, have been reviewed and that systems have been established to mitigate those risks”.
Paragraph 31 (g)Risk management
‘Smith’ key features
The Code applies to listed companies for reporting years beginning on or after 01.11.2003. Its principles and provisions are a major source of best practice for organisations including charities.
…The Court of Public Opinion
The story so far:
- Welcomes long overdue legal reforms
- Keen to ensure smaller charities are not “over-burdened”
- Like to see charities given greater freedom to trade
- “desire to see charities – and charitable endeavour and income – grow, not diminish in our country”
- Clarify definition of religion
- Commission to use its powers “fairly, proportionately and reasonably”
- Fundraising and public collections – CC grant “certificates of fitness”
- Review applications from new charities
- Research and report on fee charging charities
- Check all existing charities
- Provide guidance on any changes needed/right of appeal
- Queen’s Speech – 23 November - announced
- Draft bill introduced to House of Lords 20 December 2004
- Bill still to be debated, passed and Assent given
- Delayed by the General Election!
We are looking at:
A client we will call BME
Which works for the social regeneration and social integration of black and minority ethnic communities
Strategic programmes in the fields of:
- community development
- other matters
Policy and research into black and minority ethnic issues
Donations,grants and contracts from private and public sector organisations including :
- Home Office
- Office of the Deputy Prime Minister
- local authorities
- health authorities
- Association of London Government
- London Development Agency
- Millennium Commission
- Comic Relief
- Kings Fund
- Baring Foundation
- interest of funders
- concern over accountability for and use of funds
Causes for concern included:
- late filing of annual financial statements
- lack of clear and timely responses to funders enquiries over use of and accounting for monies
- poor substantiation of costs claimed
- treatment of core costs
- concern over possible double funding and misuse of grant monies
- reputation of trustees/directors and the organisation with:
- the public
- breach of grant conditions
- non-compliant financial statements
- future funding
- going concern
- expectations of funders, regulators and public
- inappropriate advice
- wrong audit and grant reports
NAO thinking: the right to ‘follow the money’ (public money)
- ‘parties reasonable expectations’ of obligations arising from arrangements
- having regard to:
- Charity Commission guidance on internal controls and Hallmarks of an Effective Charity
- SORP 2000 and in due course 2005
- substance over form
Charity Commission attitude:
- to disclosure compliance in:
- the Trustees’ Report and (not as an alternative)
- the financial statements
- comprehensive and specific disclosures
- no judgement allowance for the ‘immaterial’
- material by nature
Management accounting systems (budget and actual) must be able to:
- distinguish income and eligible costs relating to individual grants and contracts
- demonstrate on a verifiable basis core costs in accordance with terms of grants and contracts
- identify surpluses and deficits and the treatment thereof
- report to funders the key restrictions or otherwise
- demonstrate veracity of free reserves
Inability to do so calls into question whether:
- proper books and records have been kept appropriately
- true and fair view SORP-compliant financial statements can be prepared
Attention to fundamentals of book-keeping and management accounting systems and their application
Significance of grant funding and audit opinions and relationship to the organisation as a whole
Validation of free reserves
Attention to compliance
Comprehensive high level and detailed management reports covering all external reporting not just financial statements
The NAO premise is based largely on ‘substance over form’ and is not yet encapsulated in the public domain
But this is their thinking and mindset
You need to address where your understanding of this issue falls short of reality
And make sure you keep up to speed on the matter
Mazars has raised this issue with the Charity Commission in our response to the draft SORP 2005
And with the Charity Law Association as this is within their remit
The ACEVO full cost recovery template sets out a model clients could use to allocate costs in full against income
In due course ACEVO may have an interest in the matter because the sharing of risk between funder and funded is onerous
Please share any evidence you come across
- “Statement of Principles” for public benefit entities
- Accounting Standards Changes (e.g. Pensions FRS17)
- The Strategy Unit recommendations:
- improved methods for apportioning costs
- more meaningful financial comparisons
- strengthen focus on achievements
- Ongoing review process
- Focus on Achievements against Objectives
- Layout more structured
- Some more information
- Focus on Activities
- Clearer linking of income with expenditure
- Definitions expanded and clarified
NEW: induction and training of trustees
NEW: Explanation of aims, main objectives for the year, strategies for achieving objectives.
NEW: performance against objectives set, fundraising performance
NEW: Review of principal funding sources
NEW: Ethical stance of investment policy
NEW: Setting out plans and key objectives for the future
NEW: Objectives framework for next trustees annual report…
Phillip Callow/Ian Rodd/David Haines
Grants and service level agreements
We we are looking at:
Any form of audit opinion requested of the auditor in relation to public funds granted or forthcoming in relation to the provision of services as required as a condition of funding.
What is a grant?
A grant (Glossary GL20) is a voluntary payment.
It may be for the general purposes of the recipient charity or for some specific purpose such as the supply of a particular service.
It may be unconditional or be subject to conditions which if not met by the recipient may lead to part or all of the grant being repayable.
What is a performance-related grant?
A performance-related grant (Glossary GL35) is one with the characteristics of a contract:
Accounting for a performance-related grant, paragraph 80
Entitlement to the incoming resources arising on a performance-related grant should be recognised to the extent that the recipient charity has provided the goods or services.
Accounting for a performance-related grant, paragraph 80
European structured funds
Services out-sourced from publicly-funded organisations such as:
- HMG departments
- Government Offices e.g. Government Office for London
- Local authorities
- Health Authorities
- Social Services
- Non-departmental public bodies and many more
Obtain and read terms of the grant (especially those that resemble a contract)
Understand the terms and the criteria concerned for:
This is something we need to take seriously.
There is an expectation gap between you and your funders concerning accountability as to how funding has been spent, what has been achieved and how this is reported.
We need to be mindful of this when accounting for grant income and considering the likely impact on your accounts.
The uncertainty surrounding events and their outcomes which may have a significant impact on
Strategy and goals
Internal audit (is our risk management effective?)